Factsheet: Credit

What is credit?

Credit is money you borrow from a lender. You have to pay it
back by an agreed time. You need to pay back the money you have
borrowed plus interest, fees and charges. If you do not pay the
money back on time there will be extra costs.

Lenders are also called credit providers. They include banks,
credit unions, building societies and finance companies that lend
money. Lenders make money by lending money and charging interest,
fees and charges for this service.

What are interest, fees and charges?

Interest is an ongoing amount of money you pay to use
credit.

Fees and charges are the extra costs for borrowing money
(credit). They can be charged monthly or yearly. These costs can
include:

monthly fees for keeping your account

fees if you do not pay on time

fees if you do not make a repayment.

Credit law

In Australia lenders must follow consumer credit law. This is
regulated by the Australian Government. The person borrowing the
money also has to follow the law.

Types of credit

There are many different types of credit in Australia and the
type you use depends on what you borrow money for. Some examples
are credit cards, car loans, home loans, store cards, short-term
loans and consumer leases.

Remember

Credit is borrowed money you have to pay back.

Credit has extra costs.

Too much credit can cause money problems.

Hussein gets a car loan

Hussein wants to buy a second hand car. He wants the cost of
registration and insurance (about $1,000) to be included and
decides he can spend up to $5,000. This means the car can cost no
more than $4,000. He does not have any savings so he has to borrow
the money.

One Saturday morning, Hussein goes to the car yard to look for a
second hand car. He sees one he likes for $3,900. Hussein finds a
sales person and asks some questions about the car. Hussein wants
to know if the car is reliable, what year it was made and if it is
safe to drive. Hussein decides he would like to buy the car. The
car yard's finance person says Hussein can apply for a loan but he
must answer some questions first.

Hussein gives the information to the finance person. The finance
person tells Hussein he is able to get the loan for $4,900 (which
will also pay for the registration and insurance).

The finance person gives Hussein the credit contract and asks
him to read it and sign it. However, Hussein's friend once told him
'Never sign something you do not understand.' Hussein wants to read
the whole contract so he asks if he can take it home to read first.
He agrees to meet the finance person again on Monday morning.

Hussein reads the credit contract and goes back to the car yard
on Monday to meet with the finance person. After reading the credit
contract, Hussein has many questions. He asks the finance person
what the total amount of the loan is, what the interest rate is,
how much and often he needs to make the repayments, and how long
the credit contract is for. Hussein completely understands the
terms and conditions of the loan and he signs the contract and buys
the car.

Where to get more information

For more information about credit, visit MoneySmart or call
1300 300 630. You can also call a Financial Information Service
Officer on 13 23 00 who will help you better manage your use of
credit. To order your credit file, visit www.mycreditfile.com.au.